### Understanding Taxes: Marginal Rates, Deductions, and Credits

Taxes confuse many Americans, but understanding them is essential for effective wealth building.

### Understanding Taxes: Demystifying Your Money and Wealth Building
* 💰 Taxes are a fundamental aspect of personal finance that affect every American, yet many remain confused about how they work, with **over half of Americans unsure of the basics**.
* 📊 The most common misunderstanding revolves around the **marginal tax rate**, or tax bracket; for example, a single person earning $100,000 falls into a **22% bracket**, but this does not mean they pay **22% on their entire income**.
* Instead, the marginal tax rate applies progressively, meaning they pay **10% on the first $11,600**, **12% on the next $35,515**, and only **22% on income above that**, resulting in an **effective tax rate of just over 17.7%**.
* 📝 Tax deductions reduce taxable income, such as a **$1,000 deduction** lowering a **$100,000 income** to **$99,000**, and they can be standard or itemized, with the standard deduction being a **flat amount based on filing status**.
* 💡 Itemized deductions include charitable contributions, state and local taxes, and mortgage interest, which can be claimed if they **exceed the standard deduction**.
* 💵 A tax credit, on the other hand, **directly reduces the tax owed**, making it **more powerful than a deduction**; for instance, a **$1,000 credit** on a **$17,500 tax bill** lowers it to **$16,500**.
* 👶 The child tax credit is a common example, allowing parents to claim credits for qualifying children, emphasizing the **importance of understanding these terms** to effectively manage taxes.
* 🔍 For more detailed information, resources are available at money.com/resources, and it's crucial to **engage in tax planning legally**, distinguishing between **tax avoidance and tax evasion**.

let's talk about how taxes actually work where's all your money gone Don taxes this is one of the most fundamental concepts in personal finance taxes are something that affects every American and yet most Americans they remain a complete mystery over half of all Americans said they had no idea how

taxes even work knowing what your money's doing and where it's going is crucial to your wealth building Journey I b my money you know what else is a crucial component to your wealth build building Journey subscribing to the money guys show so make sure you hit

that subscribe button and even ring the notification Bell okay let's jump right in the most common misunderstanding about how taxes work is usually around your marginal tax rate also known as your tax bracket let's say you're a single person making $100,000 that means your marginal tax

rate is 22% now you might be thinking that means you pay $22,000 of taxes or 22% of $100,000 but that's not how it works a marginal rate is actually the rate you pay on each additional dollar take a look at

the federal income tax brackets what this means is that you pay 10% on the first $11,600 of your pay every additional dollar up to 47,115 is taxed at 12% and only the dollars from 47,150 all the way up to $100,000 is

taxed at that 22% tax rate if you do the math you're actually paying $17,500 in taxes that means that your effective tax rate is just over 17.7% so when you hear people say I don't want to make any more money cuz that'll put me

into a higher tax bracket and I'll actually make less, that is completely wrong. You hate money or something. You might hear people mention tax deductions. You might also hear them talk about tax credits. Your head starts spinning. Don't worry, we're going to help you figure

this out. The Money Guys are here to help you navigate and know what all these tax terms mean. So let's clear this up: a tax deduction is a reduction in your taxable income. This means if you have a $1,000 tax deduction on your $100,000 income,

your taxable income would only be $99,000 after the deduction. One thing to note about deductions is they come really in two forms. There's the standard deduction which is based upon your filing status: single, married, and then there's itemized deductions. The standard

is something the government just gives you overall. Itemize means you have to exceed the standard and now you get to actually take every one of those deductions above and beyond that standard deduction. Mark, there are deductions you get to take even if you're claiming the standard deduction.

I'm talking about health savings account contributions. I'm talking about IRA contributions. However, I want to make sure I don't skip out on those itemized deductions when we talk about itemized deductions. We're primarily talking about charitable contributions. We're talking

about your state and local taxes that you pay as well as that mortgage interest that you're paying on your outstanding loan. Now, the next term: a tax credit is actually more powerful than a deduction. It is a reduction in the amount of taxes owed. So if your tax bill

on $100,000 income is $17,500. A $1,000 tax credit means you would actually owe $16,500 in taxes. A common example of this is the child tax credit where parents or guardians can claim a tax credit for their child if they're under

17, have a Social Security number and are claimed as a dependent on the taxpayer's return. It is very important to remember all of this should be done honestly and legally. Tax avoidance is legal, tax evasion is not. If you want a more comprehensive guide on the ins and outs

of taxes, I want to encourage you to go to money.com/resources. We update our tax guide every year to keep you on the right track. Make sure you check out that resource and all the other free resources at money.com. And also make sure you like

and subscribe to the content so you can own your financial future that much sooner. [Music]

Do You Know THIS About Taxes?

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Understanding Basic Tax Concepts and Marginal Tax Rates

Many Americans misunderstand how taxes work.

Understanding taxes is crucial for wealth building.

A common misunderstanding is about marginal tax rates (tax brackets).

Marginal rate is the rate on each additional dollar earned, not the overall rate.

Example:  A $100,000 income doesn't mean paying 22% of the entire amount.

Moving to a higher bracket doesn't automatically mean less money.

Deductions include standard and itemized deductions.

Some deductions are available even with the standard deduction (HSA, IRA contributions).

Itemized deductions include charitable contributions, state/local taxes, and mortgage interest.

A tax credit directly reduces the amount of taxes owed (more powerful than a deduction).

Legal and Ethical Considerations and Further Resources

Tax avoidance is legal; tax evasion is not.

More comprehensive tax guides are available at money.com/resources.